India Economy

The Indian economy, which is the third largest in the world in terms of purchasing power, is going to touch new heights in the coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy in the world just after U.S. and China. It will grow to 60% of size of the U.S. economy. This booming economy of today has passed through many phases before it achieved the current milestone.

History of Indian Economy

The history of Indian economy can be broadly divided into three phases: pre-colonial, colonial and post colonial.

Pre-Colonial: The economic history of India since Indus Valley Civilisation to 1700 AD can be categorised under this phase. During Indus Valley Civilisation, the Indian economy was very well developed. It had very good trade relations with other parts of the world, which is evident from the coins of various civilisations found at the site of Indus Valley.

Before the advent of the East India Company, each village in India was a self-sufficient entity and was economically independent as all the economic needs were fulfilled within the village.

Colonial Indian Economy: The arrival of the East India Company in the country caused a huge strain on the Indian economy and there was a two-way depletion of resources. The British would buy raw materials from India at cheaper rates and the finished goods were sold at higher than normal price in Indian markets. During this phase India's share of world income declined from 22.3% in 1700 AD to 3.8% in 1952.

Post Colonial Indian Economy: After India got Independence from colonial rule in 1947, the process of rebuilding the economy started. For this various policies and schemes were formulated. First five-year plan for the development of Indian economy came into implementation in 1952. These Five-Year Plans, started by Indian government, focussed on the needs of the Indian economy.

If on one hand agriculture received the immediate attention on the other the industrial sector was developed at a fast pace to provide employment opportunities to the growing population and to keep pace with the developments in the world. Since then the Indian economy has come a long way. The Gross Domestic Product (GDP) at factor cost, which was 2.3 % in 1951-52 reached 6.5 in the financial year 2011-2012.

Trade liberalisation, financial liberalisation, tax reforms and opening up to foreign investments were some of the important steps, which helped Indian economy to gain momentum. The Economic liberalisation introduced by Manmohan Singh in 1991, the then finance minister in the government of P V Narasimha Rao, proved to be the stepping-stone for Indian economic reform movements.

Sectors of Indian Economy

In any society, economy is classified into different sectors or components. A group of certain economic activities forms different sectors. The economic activities are the outcome of the production of good and services. In India, there are mainly three different sectors of the economy - primary sector, secondary sector and tertiary sector. Read More...

Major Contributors to the Indian Economy

Three major sectors contribute to the Indian economy and the GDP of the country. These are: (i) agriculture - which includes crops, milk, animal husbandry, fishing, forestry and some other activities. (ii) industry - which includes several manufacturing sub-sectors, and (iii) services - which includes retail, construction, software, communication, IT, banking, healthcare and other economic activities.

Agriculture - In agriculture production, India ranks second in the world. Agriculture and related activities accounts for about 18% of the total GDP and also employ approximately 50% of the total workforce of the country. The agriculture sector's contribution to the economy has been increasing with every financial year. In the financial year 2013-14, food grain production in the country stood at 264 million tonnes. Read More...

Industry - Industry contributes about 26% of the GDP and 22% of the total workforce in India is associated with industry sector. There are many sub-sectors in industry which generate revenue for this sector such as petroleum, engineering, pharmaceuticals, mining, textile and many more. Read More...

Services- The Indian service sectors account for about 60% of the total GDP. Information technology (IT), IT enabled services (ITeS) and e-commerce has led to the growth of this sector. The services sector has also attracted the highest amount of foreign equity with the government's foreign direct investment (FDI) policies. Read More...

Challenges before Indian economy:
  • Population explosion: The rising population is eating into the success of India. According to 2011 census, the population of India has crossed one billion and is growing at a rate of 2.11% approximately. Such a vast population puts lot of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population.

  • Poverty: As per records of National Planning Commission, 36 crore people were living below the poverty line in India in 2012.

  • Unemployment: The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean.

  • Rural Urban Divide: It is said that India lies in villages. Even today when there is lot of talk about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in the pace of rural and urban growth. Unless there isn't a balanced development Indian economy cannot grow.

These challenges can be overcome by the sustained and planned economic reforms.

These include:
  • Maintaining fiscal discipline
  • Orientation of public expenditure towards sectors in which India is faring badly such as health and education.
  • Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India.
  • Reorganisation of the agricultural sector, introduction of new technology, reducing agriculture's dependence on monsoon by developing means of irrigation.
  • Introduction of financial reforms including privatisation of some public sector banks.

  India's GDP rate since 1951-14:  
YearsAgriculture, forestry & fishing, mining and quarrying (in %)Manufacturing, construction, electricity, gas and water Supply (in %)Trade, hotels, transport & Communication (in %)Financing, insurance, real estate and business Services (in %)Community, Social & Personal Services (in %)Gross domestic product at factor cost (in %)

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Last Updated on : May 28, 2015